The technical analysis is a method based on the study of charts which get attention to the price of the instruments, the volume of the trading and, when that is possible, open interest of the instruments. The fundamental analysis is a method founded on economic, political, environmental factors and any other factor.
In practice, much of actors of the forex market use the technical analysis in conjunction with the fundamental analysis to determine their strategy in forex trading.
One of the principal advantages of the technical analysis is that the experienced analysts can follow several instruments of market, whereas the fundamental analyst needs to know narrowly a market in particular.
The Indicators used on Forex Trading Charts by Technical analysts
The index of relative force (RSI):
This index is the most popular indicator of the Forex Market. The RSI measures the report/ratio of the upward trends compared to downward trends and standardizes calculation so that the index is expressed by a figure between 1 and 100. If the RSI is 70 or superior then the instrument is perceived in overbought (a situation in which the prices increased well beyond the expectations of the market). A RSI lower or equal to 30 announces an instrument in a position of oversold (a situation in which the prices fell much more than the market expected it).
Moving Average Convergence Divergence (MACD):
This indicator consists in tracing two lines of momentum. Line MACD is the difference between two moving average exponential and the line of signal which is an exponential moving average of the difference. If line MACD and the line of signal cross, this is regarded as a sign of very probable change of tendency.
The stochastic oscillator:
It is used to indicate the conditions of overbought/oversold on a scale from 0 to 100 %. This indicator is based on the made observation that on a strong upward trend, the closing prices tend to concentrate on the highest part of extended of the period. Conversely, when the prices are in strong downtrend tendency, the closing prices tend to concentrate on the lowest part of extended of the period. Stochastic calculations produce two lines, %K and %D which is used to indicate the zones of overbought/oversold on a graph. The divergence between the stochastic lines and the price of the action of the subjacent instrument provides a very powerful signal.
The theory of numbers - Fibonacci:
Fibonacci list numbers (1,1,2,3,5,8,13,21,34.....) is built by the addition of two numbers to get a third. The proportion of any number compared to the following is 62 %, which is a popular figure of fold of Fibonacci. The reverse of 62%, which is 38%, is also used in Forex Trading like a figure of fold of Fibonacci (used with the Theory of the Waves of Elliott)
The theory of Elliott Waves:
The theory of Elliott Waves is an approach with the forex market research which bases on the repetitions of patterns waves and on the Fibonacci theorie. An ideal pattern of vagueness of Elliott comprises five followed rising waves of three declining waves.
The Gann angles:
W.D. Gann was a trader in stock and values who worked in the Fifties and which would have made more than 50 billion dollars on the market. It made fortune by using methods that he developed as tools of trade based on the relations between the movement of price and the time, known as a price/time equivalences. There is no simple explanation for the methods of Gann: it used the angles in the graphs to define the zones of supports and resistances and to predict the moments of future changes of tendencies. It used also lines on the graphs to define the zones of supports and resistances.
A tendency refers to the direction of the prices. The peaks and the hollows of rise constitute the upward trends; the peaks and the hollows of fall constitute the downward trends, which define the slope of the current tendency. The rupture of a line of tendency generally indicates an inversion of tendency. A variation of trade is characterized by horizontal peaks and hollows. Moving average is used to harmonize information about price so as to confirm the tendencies and the levels of support and resistance. It is always useful to decide on a Forex Trading strategy or particularly for future trades or markets presenting a strong upward trend or downward. For simple moving averages, the price is realised on a certain number of days. Day after day, the oldest price is withdrawn and replaced by the price of the current day - thus the average changes every days. For moving average exponential or balanced, use the same system but balance the figures - the weighting coefficient low for the oldest price and the highest coefficient for the most recent price.
The gaps are the spaces left on the histograms where no trade took place. A up-gap, or ditch of rise, is formed when the price low of a day of exchanges is higher than the highest price of the previous day. A down-gap, or ditch of fall, is formed when the price highest of a day is lower than the price low of the previous day. A up-gap is generally a sign of force of market, whereas a down-gap is a sign of weakness of market. A gap or ditch of rupture is a ditch of price which is constituted when a pattern important price is supplemented. This announces the beginning of a movement of important price. A gap or ditch of exhaust is a ditch of price which generally occurs about the middle of an important tendency of market. For this reason, it is also called a ditch of measurement. A gap or ditch of breathlessness is a ditch of price which occurs at the end of an important tendency and which announces that the tendency arrives at its end.